The Digital Revolution gets all the headlines
these days. But turning slowly beneath the fast-forward
turbulence, steadily driving the gyrating cycles of cool
technogadgets and gotta-haves, is a much more profound revolution
- the Network Economy.

This emerging new economy represents a tectonic
upheaval in our commonwealth, a social shift that reorders
our lives more than mere hardware or software ever can.
It has its own distinct opportunities and its own new rules.
Those who play by the new rules will prosper; those who
ignore them will not.

The advent of the new economy was first noticed
as far back as 1969, when Peter Drucker perceived the arrival
of knowledge workers. The new economy is often referred
to as the Information Economy, because of information's
superior role (rather than material resources or capital)
in creating wealth.

I prefer the term Network Economy, because
information isn't enough to explain the discontinuities
we see. We have been awash in a steadily increasing tide
of information for the past century. Many successful knowledge
businesses have been built on information capital, but only
recently has a total reconfiguration of information itself
shifted the whole economy.

The grand irony of our times is that the
era of computers is over. All the major consequences of
stand-alone computers have already taken place. Computers
have speeded up our lives a bit, and that's it.

In contrast, all the most promising technologies
making their debut now are chiefly due to communication
between computers - that is, to connections rather than
to computations. And since communication is the basis of
culture, fiddling at this level is indeed momentous.

And fiddle we do. The technology we first
invented to crunch spreadsheets has been hijacked to connect
our isolated selves instead. Information's critical rearrangement
is the widespread, relentless act of connecting everything
to everything else. We are now engaged in a grand scheme
to augment, amplify, enhance, and extend the relationships
and communications between all beings and all objects. That
is why the Network Economy is a big deal.

The new rules governing this global restructuring
revolve around several axes. First, wealth in this new regime
flows directly from innovation, not optimization; that is,
wealth is not gained by perfecting the known, but by imperfectly
seizing the unknown. Second, the ideal environment for cultivating
the unknown is to nurture the supreme agility and nimbleness
of networks. Third, the domestication of the unknown inevitably
means abandoning the highly successful known - undoing the
perfected. And last, in the thickening web of the Network
Economy, the cycle of "find, nurture, destroy" happens faster
and more intensely than ever before.

The Network Economy is not the end of history.
Given the rate of change, this economic arrangement may
not endure more than a generation or two. Once networks
have saturated every space in our lives, an entirely new
set of rules will take hold. Take these principles, then,
as rules of thumb for the interim.

1 The Law of Connection

Embrace dumb power

The Network Economy is fed by the deep resonance
of two stellar bangs: the collapsing microcosm of chips
and the exploding telecosm of connections. These sudden
shifts are tearing the old laws of wealth apart and preparing
territory for the emerging economy.

As the size of silicon chips shrinks to the
microscopic, their costs shrink to the microscopic as well.
They become cheap and tiny enough to slip into every - and
the key word here is every - object we make. The notion
that all doors in a building should contain a computer chip
seemed ludicrous 10 years ago, but now there is hardly a
hotel door without a blinking, beeping chip. Soon, if National
Semiconductor gets its way, every FedEx package will be
stamped with a disposable silicon flake that smartly tracks
the contents. If an ephemeral package can have a chip, so
can your chair, each book, a new coat, a basketball. Thin
slices of plastic known as smart cards hold a throwaway
chip smart enough to be your banker. Soon, all manufactured
objects, from tennis shoes to hammers to lamp shades to
cans of soup, will have embedded in them a tiny sliver of
thought. And why not?

The world is populated by 200 million computers.
Andy Grove of Intel happily estimates that we'll see 500
million of these by 2002. Yet the number of noncomputer
chips now pulsating in the world is 6 billion! They are
already embedded in your car and stereo and rice cooker.
Because they can be stamped out fast and cheap, like candy
gumdrops, these chips are known in the industry as "jelly
beans." And we are in the dawn of a jelly bean explosion:
there'll be 10 billion grains of working silicon by 2005,
a billion not long after. Someday each of them may be as
smart as an ant, dissolved into our habitat.

As we implant a billion specks of our thought
into everything we make, we are also connecting them up.
Stationary objects are wired together. The nonstationary
rest - that is, most manufactured objects - will be linked
by infrared and radio, creating a wireless web vastly larger
than the wired web. It is not necessary that each connected
object transmit much data. A tiny chip plastered inside
a water tank on an Australian ranch transmits only the telegraphic
message of whether it is full or not. A chip on the horn
of each steer beams out his pure location, nothing more:
"I'm here, I'm here." The chip in the gate at the end of
the road communicates only when it was last opened: "Tuesday."

The glory of these connected crumbs is that
they don't need to be artificially intelligent. Instead,
they work on the dumb power of a few bits linked together.
Dumb power is what you get when you network dumb nodes into
a smart web. It's what our brains do with dumb neurons and
what the Internet did with dumb personal computers. A PC
is the conceptual equivalent of a single neuron housed in
a plastic case. When linked by the telecosm into a neural
network, these dumb PC nodes created that fabulous intelligence
called the World Wide Web. It works in other domains: dumb
parts, properly connected, yield smart results.

A trillion dumb chips connected into a hive
mind is the hardware. The software that runs through it
is the Network Economy. A planet of hyperlinked chips emits
a ceaseless flow of small messages, cascading into the most
nimble waves of sensibility. Every farm moisture sensor
shoots up data, every weather satellite beams down digitized
images, every cash register spits out bit streams, every
hospital monitor trickles out numbers, every Web site tallies
attention, every vehicle transmits its location code; all
of this is sent swirling into the web. That tide of signals
is the net.

The net is not just humans typing at each
other on AOL, although that is part of it too and will be
as long as seducing the romantic and flaming the idiotic
are enjoyable. Rather, the net is the collective interaction
spun off by a trillion objects and living beings, linked
together through air and glass.

This is the net that begets the Network Economy.
According to MCI, the total volume of voice traffic on global
phone systems will be superseded by the total volume of
data traffic in three years. We're already on the way to
an expanded economy full of new participants: agents, bots,
objects, and machines, as well as several billion more humans.
We won't wait for AI to make intelligent systems; we'll
do it with the dumb power of ubiquitous computing and pervasive
connections.

The whole shebang won't happen tomorrow,
but the trajectory is clear. We are connecting all to all.
Every step we take that banks on cheap, rampant, and universal
connection is a step in the right direction. Furthermore,
the surest way to advance massive connectionism is to exploit
decentralized forces - to link the distributed bottom. How
do you make a better bridge? Let the parts talk to each
other. How do you improve lettuce farming? Let the soil
speak to the farmer's tractors. How do you make aircraft
safe? Let the airplanes communicate among themselves and
pick their own flight paths.

In the Network Economy, embrace dumb power.

2 The Law of Plentitude

More gives more

Curious things happen when you connect all
to all. Mathematicians have proven that the sum of a network
increases as the square of the number of members. In other
words, as the number of nodes in a network increases arithmetically,
the value of the network increases exponentially. Adding
a few more members can dramatically increase the value for
all members.

Consider the first modern fax machine that
rolled off the conveyor belt around 1965. Despite millions
of dollars spent on its R&D, it was worth nothing. Zero.
The second fax machine to roll off immediately made the
first one worth something. There was someone to fax to.
Because fax machines are linked into a network, each additional
fax machine sliding down the chute increases the value of
all the fax machines operating before it.

So strong is this network value that anyone
purchasing a fax machine becomes an evangelist for the fax
network. "Do you have a fax?" fax owners ask you. "You should
get one." Why? Your purchase increases the worth of their
machine. And once you join the network, you'll begin to
ask others, "Do you have a fax (or email, or Acrobat software,
etc)?" Each additional account you can persuade onto the
network substantially increases the value of your account.

When you go to Office Depot to buy a fax
machine, you are not just buying a US$200 box. You are purchasing
for $200 the entire network of all other fax machines and
the connections between them - a value far greater than
the cost of all the separate machines.

The fax effect suggests that the more plentiful
things become, the more valuable they become. But this notion
directly contradicts two of the most fundamental axioms
we attribute to the industrial age.

First hoary axiom: Value came from scarcity;
diamonds, gold, oil, and college degrees were precious because
they were scarce.

Second hoary axiom: When things were made
plentiful, they became devalued; carpets no longer indicated
status when they could be woven by the thousands on machines.

The logic of the network flips these industrial
lessons upside down. In a Network Economy, value is derived
from plentitude, just as a fax machine's value increases
in ubiquity. Power comes from abundance. Copies (even physical
copies) are cheap. Therefore, let them proliferate.

Instead, what is valuable is the scattered
relationships - sparked by the copies - that become tangled
up in the network itself. And the relationships rocket upward
in value as the parts increase in number even slightly.
Windows NT, fax machines, TCP/IP, GIF images, RealAudio
- all born deep in the Network Economy - adhere to this
logic. But so do metric wrenches, triple-A batteries, and
other devices that rely on universal standards; the more
common they are, the more it pays you to stick to that standard.

In the future, cotton shirts, bottles of
vitamins, chain saws, and the rest of the industrial objects
in the world will also obey the law of plentitude as the
cost of producing an additional copy of them falls steeply,
while the value of the network that invents, manufactures,
and distributes them increases.

In the Network Economy, scarcity is overwhelmed
by shrinking marginal costs. Where the expense of churning
out another copy becomes trivial (and this is happening
in more than software), the value of standards and the network
booms.

In the Network Economy, more gives more.

3 The Law of Exponential
Value

Success is nonlinear

The chart of Microsoft's cornucopia of profits
is a revealing graph because it mirrors several other plots
of rising stars in the Network Economy. During its first
10 years, Microsoft's profits were negligible. Its profits
rose above the background noise only around 1985. But once
they began to rise, they exploded.

Federal Express experienced a similar trajectory:
years of minuscule profit increases, slowly ramping up to
an invisible threshold, and then surging skyward in a blast
sometime during the early 1980s.

The penetration of fax machines likewise
follows a tale of a 20-year overnight success. Two decades
of marginal success, then, during the mid-1980s, the number
of fax machines quietly crosses the point of no return -
and the next thing you know, they are irreversibly everywhere.

The archetypical illustration of a success
explosion in a Network Economy is the Internet itself. As
any old-time nethead will be quick to lecture you, the Internet
was a lonely (but thrilling!) cultural backwater for two
decades before it hit the media radar. A graph of the number
of Internet hosts worldwide, starting in the 1960s, hardly
creeps above the bottom line. Then, around 1991, the global
tally of hosts suddenly mushrooms, exponentially arcing
up to take over the world.

Each of these curves (I owe Net Gain author
John Hagel credit for these four examples) is a classic
template of exponential growth, compounding in a nonlinear
way. Biologists know about exponential growth; such curves
are almost the definition of a biological system. That's
one reason the Network Economy is often described more accurately
in biological terms. Indeed, if the Web feels like a frontier,
it's because for the first time in history we are witnessing
biological growth in technological systems.

At the same time, each of the above examples
is a classic model of the Network Economy. The compounded
successes of Microsoft, FedEx, fax machines, and the Internet
all hinge on the prime law of networks: value explodes exponentially
with membership, while this value explosion sucks in yet
more members. The virtuous circle inflates until all potential
members are joined.

The subtle point from these examples, however,
is that this explosion did not ignite until approximately
the late 1980s. Something happened then. That something
was the dual big bangs of jelly bean chips and collapsing
telco charges. It became feasible - that is, dirt cheap
- to exchange data almost anywhere, anytime. The net, the
grand net, began to nucleate. Network power followed.

Now that we've entered the realm where virtuous
circles can unfurl overnight successes in a biological way,
a cautionary tale is in order. One day, along the beach,
tiny red algae blooms into a vast red tide. Then, a few
weeks later, just when the red mat seems indelible, it vanishes.
Lemmings boom and disappear. The same biological forces
that amplify populations can mute them. The same forces
that feed on each other to amplify network presences into
powerful overnight standards can also work in reverse to
unravel them in a blink. Small beginnings can lead to large
results, while large disturbances have only small effects.

In the Network Economy, success is nonlinear.

4 The Law of Tipping
Points

Significance precedes
momentum

There is yet one more lesson to take from
these primeval cases of the Network Economy. And here, another
biological insight will be handy. In retrospect, one can
see from these expo-curves that a point exists where the
momentum was so overwhelming that success became a runaway
event. Success became infectious, so to speak, and spread
pervasively to the extent that it became difficult for the
uninfected to avoid succumbing. (How long can you hold out
not having a phone?)

In epidemiology, the point at which a disease
has infected enough hosts that the infection moves from
local illness to raging epidemic can be thought of as the
tipping point. The contagion's momentum has tipped from
pushing uphill against all odds to rolling downhill with
all odds behind it. In biology, the tipping points of fatal
diseases are fairly high, but in technology, they seem to
trigger at much lower percentages of victims or members.

There has always been a tipping point in
any business, industrial or network, after which success
feeds upon itself. However, the low fixed costs, insignificant
marginal costs, and rapid distribution that we find in the
Network Economy depress tipping points below the levels
of industrial times; it is as if the new bugs are more contagious
- and more potent. Smaller initial pools can lead to runaway
dominance.

Lower tipping points, in turn, mean that
the threshold of significance - the period before the tipping
point during which a movement, growth, or innovation must
be taken seriously - is also dramatically lower than it
was during the industrial age. Detecting events while they
are beneath this threshold is essential.

Major US retailers refused to pay attention
to TV home-shopping networks during the 1980s because the
number of people watching and buying from them was initially
so small and marginalized that it did not meet the established
level of retail significance. Instead of heeding the new
subtle threshold of network economics, the retailers waited
until the alarm of the tipping point sounded, which meant,
by definition, that it was too late for them to cash in.

In the past, an innovation's momentum indicated
significance. Now, in the network environment, significance
precedes momentum.

Biologists tell a parable of the lily leaf,
which doubles in size every day. The day before it completely
covers the pond, the water is only half covered, and the
day before that, only a quarter covered, and the day before
that, only a measly eighth. So, while the lily grows imperceptibly
all summer long, only in the last week of the cycle would
most bystanders notice its "sudden" appearance. But by then,
it is far past the tipping point.

The Network Economy is a lily pond. The Web,
as one example, is a leaf doubling in size every six months.
MUDs and MOOs, Teledesic phones, wireless data ports, collaborative
bots, and remote solid state sensors are also leaves in
the network lily pond. Right now, they are just itsy-bitsy
lily cells merrily festering at the beginning of a hot network
summer.

In the Network Economy, significance precedes
momentum.

5 The Law of Increasing
Returns

Make virtuous circles

The prime law of networking is known as the
law of increasing returns. Value explodes with membership,
and the value explosion sucks in more members, compounding
the result. An old saying puts it more succinctly: Them
that's got shall get.

We see this effect in the way areas such
as Silicon Valley grow; each new successful start-up attracts
other start-ups, which in turn attract more capital and
skills and yet more start-ups. (Silicon Valley and other
high tech industrial regions are themselves tightly coupled
networks of talent, resources, and opportunities.)

The law of increasing returns is far more
than the textbook notion of economies of scale. In the old
rules, Henry Ford leveraged his success in selling cars
to devise more efficient methods of production. This enabled
Ford to sell his cars more cheaply, which created larger
sales, which fueled more innovation and even better production
methods, sending his company to the top. While the law of
increasing returns and the economies of scale both rely
on positive feedback loops, the former is propelled by the
amazing potency of net power, and the latter isn't. First,
industrial economies of scale increase value linearly, while
the prime law increases value exponentially - the difference
between a piggy bank and compounded interest.

Second, and more important, industrial economies
of scale stem from the herculean efforts of a single organization
to outpace the competition by creating value for less. The
expertise (and advantage) developed by the leading company
is its alone. By contrast, networked increasing returns
are created and shared by the entire network. Many agents,
users, and competitors together create the network's value.
Although the gains of increasing returns may be reaped unequally
by one organization over another, the value of the gains
resides in the greater web of relationships.

Huge amounts of cash may pour toward network
winners such as Cisco or Oracle or Microsoft, but the supersaturated
matrix of increasing returns woven through their companies
would continue to expand into the net even if those particular
companies should disappear.

Likewise, the increasing returns we see in
Silicon Valley are not dependent on any particular company's
success. As AnnaLee Saxenian, author of Regional Advantage,
notes, Silicon Valley has in effect become one large, distributed
company. "People joke that you can change jobs without changing
car pools," Saxenian told Washington Post reporter Elizabeth
Corcoran. "Some say they wake up thinking they work for
Silicon Valley. Their loyalty is more to advancing technology
or to the region than it is to any individual firm."

One can take this trend further. We are headed
into an era when both workers and consumers will feel more
loyalty to a network than to any ordinary firm. The great
innovation of Silicon Valley is not the wowie-zowie hardware
and software it has invented, but the social organization
of its companies and, most important, the networked architecture
of the region itself - the tangled web of former jobs, intimate
colleagues, information leakage from one firm to the next,
rapid company life cycles, and agile email culture. This
social web, suffused into the warm hardware of jelly bean
chips and copper neurons, creates a true Network Economy.

The nature of the law of increasing returns
favors the early. The initial parameters and conventions
that give a network its very power quickly freeze into unalterable
standards. The solidifying standards of a network are both
its blessing and its curse - a blessing because from the
de facto collective agreement flows the unleashed power
of increasing returns, and a curse because those who own
or control the standard are disproportionately rewarded.

But the Network Economy doesn't allow one
without the other. Microsoft's billions are tolerated because
so many others in the Network Economy have made their collective
billions on the advantages of Microsoft's increasing-returns
standards.

In a Network Economy, life is tricky for
consumers, who must decide which early protocol to support.
Withdrawing later from the wrong network of relationships
is painful - but not as painful as companies who bet their
whole lives on the wrong one. Nonetheless, guessing wrong
about conventions is still better than ignoring network
dynamics altogether. There is no future for hermetically
sealed closed systems in the Network Economy. The more dimensions
accessible to member input and creation, the more increasing
returns can animate the network, the more the system will
feed on itself and prosper. The less it allows these, the
more it will be bypassed.

The Network Economy rewards schemes that
allow decentralized creation and punishes those that don't.
An automobile maker in the industrial age maintains control
over all aspects of the car's parts and construction. An
automobile maker in the Network Economy will establish a
web of standards and outsourced suppliers, encouraging the
web itself to invent the car, seeding the system with knowledge
it gives away, engaging as many participants as broadly
as possible, in order to create a virtuous loop where every
member's success is shared and leveraged by all.

In the Network Economy, make virtuous circles.

6 The Law of Inverse
Pricing

Anticipate the cheap

One curious aspect of the Network Economy
would astound a citizen living in 1897: The very best gets
cheaper each year. This rule of thumb is so ingrained in
our contemporary lifestyle that we bank on it without marveling
at it. But marvel we should, because this paradox is a major
engine of the new economy.

Through most of the industrial age, consumers
experienced slight improvements in quality for slight increases
in price. But the arrival of the microprocessor flipped
the price equation. In the information age, consumers quickly
came to count on drastically superior quality for less price
over time. The price and quality curves diverge so dramatically
that it sometimes seems as if the better something is, the
cheaper it will cost.

Computer chips launched this inversion, as
Ted Lewis, author of The Friction Free Economy, points out.
Engineers used the supreme virtues of computers to directly
and indirectly create the next improved version of computers.
By compounding our learning in this fashion, we got more
out of less material. So potent is compounding chip power
that everything it touches - cars, clothes, food - falls
under its spell. Indirectly amplified learning by shrinking
chips enabled just-in-time production systems and the outsourcing
of very high tech manufacturing to low-wage labor - both
of which lowered the prices of goods still further.

Today, shrinking chip meets exploding net.
Just as we leveraged compounded learning in creating the
microprocessor, we are leveraging the same multiplying loops
in creating the global communications web. We use the supreme
virtues of networked communications to directly and indirectly
create better versions of networked communications.

Almost from their birth in 1971, microprocessors
have lived in the realm of inverted pricing. Now, telecommunications
is about to experience the same kind of plunges that microprocessor
chips take - halving in price, or doubling in power, every
18 months - but even more drastically. The chip's pricing
flip was called Moore's Law. The net's flip is called Gilder's
Law, for George Gilder, a radical technotheorist who forecasts
that for the foreseeable future (the next 25 years), the
total bandwidth of communication systems will triple every
12 months.

The conjunction of escalating communication
power with shrinking size of jelly bean nodes at collapsing
prices leads Gilder to speak of bandwidth becoming free.
What he means is that the price per bit transmitted slides
down an asymptotic curve toward the free. An asymptotic
curve is like Zero's tortoise: with each step forward, the
tortoise gets closer to the limit but never actually reaches
it. An asymptotic price curve falls toward the free without
ever touching it, but its trajectory closely paralleling
the free is what becomes important.

In the Network Economy, bandwidth is not
the only thing headed this way. Mips-per-dollar calculations
head toward the free. Transaction costs dive toward the
free. Information itself - headlines and stock quotes -
plunges toward the free. Indeed, all items that can be copied,
both tangible and intangible, adhere to the law of inverted
pricing and become cheaper as they improve. While it is
true that automobiles will never be free, the cost per mile
will dip toward the free. It is the function per dollar
that continues to drop.

For consumers, this is heaven. For those
hoping to make a buck, this will be a cruel world. Prices
will eventually settle down near the free (gulp!), but quality
is completely open-ended at the top. For instance, all-you-can-use
telephone service someday will be essentially free, but
its quality can only continue to ascend, just to keep competitive.

So how will the telcos - and others - make
enough money for profit, R&D, and system maintenance? By
expanding what we consider a telephone to be. Over time,
any invented product is on a one-way trip over the cliff
of inverted pricing and down the curve toward the free.
As the Network Economy catches up to all manufactured items,
they will all slide down this chute more rapidly than ever.
Our job, then, is to create new things to send down the
slide - in short, to invent items faster than they are commoditized.

This is easier to do in a network-based economy
because the criss-crossing of ideas, the hyperlinking of
relationships, the agility of alliances, and the nimble
quickness of creating new nodes all support the constant
generation of new goods and services where none were before.

And, by the way, the appetite for more things
is insatiable. Each new invention placed in the economy
creates the opportunity and desire for two more. While plain
old telephone service is headed toward the free, I now have
three phone lines just for my machines and will someday
have a data "line" for every object in my house. More important,
managing these lines, the data they transmit, the messages
to me, the storage thereof, the need for mobility, all enlarge
what I think of as a phone and what I will pay a premium
for.

In the Network Economy, you can count on
the best getting cheaper; as it does, it opens a space around
it for something new that is dear. Anticipate the cheap.

7 The Law of Generosity

Follow the free

If services become more valuable the more
plentiful they are (Law #2), and if they cost less the better
and the more valuable they become (Law #6), then the extension
of this logic says that the most valuable things of all
should be those that are given away.

Microsoft gives away its Web browser, Internet
Explorer. Qualcomm, which produces Eudora, the standard
email program, is given away as freeware in order to sell
upgraded versions. Some 1 million copies of McAfee's antivirus
software are distributed free each month. And, of course,
Sun passed Java out gratis, sending its stock up and launching
a mini-industry of Java app developers.

Can you imagine a young executive in the
1940s telling the board that his latest idea is to give
away the first 40 million copies of his only product? (It's
what Netscape did 50 years later.) He would not have lasted
a New York minute.

But now, giving away the store for free is
an applauded, level-headed strategy that banks on the network's
new rules. Because compounding network knowledge inverts
prices, the marginal cost of an additional copy (intangible
or tangible) is near zero. Because value appreciates in
proportion to abundance, a flood of copies increases the
value of all the copies. Because the more value the copies
accrue, the more desirable they become, the spread of the
product becomes self-fulfilling. Once the product's worth
and indispensability is established, the company sells auxiliary
services or upgrades, enabling it to continue its generosity
and maintaining this marvelous circle.

One could argue that this frightening dynamic
works only with software, since the marginal cost of an
additional copy is already near zero. That would misread
the universality of the inverted price. Made-with-atoms
hardware is also following this force when networked. Cellular
phones are given away to sell their services. We can expect
to see direct-TV dishes - or any object with which the advantages
of being plugged in exceed the diminishing cost of replicating
the object - given away for the same reasons.

The natural question is how companies are
to survive in a world of generosity. Three points will help.

First, think of "free" as a design goal for
pricing. There is a drive toward the free - the asymptotic
free - that, even if not reached, makes the system behave
as if it does. A very small flat rate may have the same
effects as flat-out free.

Second, while one product is free, this usually
positions other services to be valuable. Thus, Sun gives
Java away to help sell servers and Netscape hands out consumer
browsers to help sell commercial server software.

Third, and most important, following the
free is a way to rehearse a service's or a good's eventual
fall to free. You structure your business as if the thing
that you are creating is free in anticipation of where its
price is going. Thus, while Sega game consoles are not free
to consumers, they are sold as loss leaders to accelerate
their eventual destiny as something that will be given away
in a Network Economy.

Another way to view this effect is in terms
of attention. The only factor becoming scarce in a world
of abundance is human attention. Each human has an absolute
limit of only 24 hours per day to provide attention to the
millions of innovations and opportunities thrown up by the
economy. Giving stuff away garners human attention, or mind
share, which then leads to market share.

Following the free also works in the other
direction. If one way to increase product value is to make
products free, then many things now without cost hide great
value. We can anticipate wealth by following the free.

In the Web's early days, the first indexes
to this uncharted territory were written by students and
given away. The indexes helped humans focus their attention
on a few sites out of thousands and helped draw attention
to the sites, so webmasters aided the indexers' efforts.
By being available free, indexes became ubiquitous. Their
ubiquity quickly led to explosive stock values for the indexers
and enabled other Web services to flourish.

So what is free now that may later lead to
extreme value? Where today is generosity preceding wealth?
A short list of online candidates would be digesters, guides,
cataloguers, FAQs, remote live cameras, Web splashes, and
numerous bots. Free for now, each of these will someday
have profitable companies built around them. These marginal
functions now are not fringe; remember, for instance, that
in the industrial age Readers Digest is the world's most
widely read magazine, that TV Guide is more profitable than
the three major networks it guides viewers to, and that
the Encyclopaedia Britannica began as a compendium of articles
by amateurs - not too dissimilar from FAQs.

But the migration from ad hoc use to commercialization
cannot be rushed. One of the law of generosity's corollaries
is that value in the Network Economy requires a protocommercial
stage. Again, wealth feeds off ubiquity, and ubiquity usually
mandates some level of sharing. The early Internet and the
early Web sported amazingly robust gift economies; goods
and services were swapped, shared generously, or donated
outright - actually, this was the sole way to acquire things
online. Idealistic as this attitude was, it was the only
sane way to launch a commercial economy in the emerging
space. The flaw that science fiction ace William Gibson
found in the Web - its capacity to waste tremendous amounts
of time - was in fact, as Gibson further noted, its saving
grace. In a Network Economy, innovations must first be seeded
into the inefficiencies of the gift economy to later sprout
in the commercial economy's efficiencies.

It's a rare (and foolish) software outfit
these days that does not introduce its wares into the free
economy as a beta version in some fashion. Fifty years ago,
the notion of releasing a product unfinished - with the
intention that the public would help complete it - would
have been considered either cowardly, cheap, or inept. But
in the new regime, this precommercial stage is brave, prudent,
and vital.

In the Network Economy, follow the free.

8 The Law of the
Allegiance

Feed the web first

The distinguishing characteristic of networks
is that they have no clear center and no clear outer boundaries.
The vital distinction between the self (us) and the nonself
(them) - once exemplified by the allegiance of the industrial-era
organization man - becomes less meaningful in a Network
Economy. The only "inside" now is whether you are on the
network or off. Individual allegiance moves away from organizations
and toward networks and network platforms. (Are you Windows
or Mac?)

Thus, we see fierce enthusiasm from consumers
for open architectures. Users are voting for maximizing
the value of the network itself. Companies have to play
this way, too. As consultant John Hagel argues, a company's
primary focus in a networked world shifts from maximizing
the firm's value to maximizing the value of the infrastructure
whole. For instance, game companies will devote as much
energy promoting the platform - the tangle of users, developers,
hardware manufactures, etc. - as they do to their product.
Unless their web thrives, they die.

The net is a possibility factory, churning
out novel opportunities by the diskful. But unless this
explosion is harnessed, it will drown the unprepared. What
the computer industry calls "standards" is an attempt to
tame the debilitating abundance of competing possibilities.
Standards strengthen a network; their constraints solidify
a pathway, allowing innovation and evolution to accelerate.
So central is the need to tame the choice of possibilities
that organizations must make the common standard their first
allegiance. Companies positioned at the gateway to a standard
will reap the largest rewards. But as a company prospers,
so do those in its web.

A network is like a country. In both, the
surest route to raising one's own prosperity is raising
the system's prosperity. The one clear effect of the industrial
age is that the prosperity individuals achieve is more closely
related to their nation's prosperity than to their own efforts.

Yet, in every network, the rule is the same.
For maximum prosperity, feed the web first.

9 The Law of Devolution

Let go at the top

The tightly linked nature of any economy,
but especially the Network Economy's ultraconnected constitution,
makes it behave ecologically. The fate of individual organizations
is not dependent entirely on their own merits, but also
on the fate of their neighbors, their allies, their competitors,
and, of course, on that of the immediate environment.

Some biomes in nature are shy of opportunities
for life. In the Arctic there are only a couple of styles
of living, and a species had better get good at one of them.
Other biomes are chock full of opportunities, and those
possibilities are in constant flux, appearing and retreating
in biological time as species jockey toward maximum adaptability.

The rich, interactive, and highly plastic
shape of the Network Economy resembles a biome seething
with action. New niches pop up constantly and go away as
fast. Competitors sprout beneath you and then gobble your
spot up. One day you are king of the mountain, and the next
day there is no mountain at all.

Biologists describe the struggle of an organism
to adapt in this biome as a long climb uphill, where uphill
means greater adaptation. In this visualization, an organism
that is maximally adapted to the times is situated on a
peak. It is easy to imagine a commercial organization substituted
for the organism. A company expends great effort to move
its butt uphill, or to evolve its product so that it is
sitting on top, where it is maximally adapted to the consumer
environment.

All organizations (profit and nonprofit alike)
face two problems as they attempt to find their peak of
optimal fit. Both are amplified by a Network Economy in
which turbulence is the norm.

First, unlike the industrial arc's relatively
simple environment, where it was fairly clear what an optimal
product looked like and where on the slow-moving horizon
a company should place itself, it is increasingly difficult
in the Network Economy to discern what hills are highest
and what summits are false.

Big and small companies alike can relate
to this problem. It's unclear whether one should strive
to be the world's best hard disc manufacturer when the mountain
beneath that particular peak may not be there in a few years.
An organization can cheer itself silly on its way to becoming
the world's expert on a dead-end technology. In biology's
phrasing, it gets stuck on a local peak.

The harsh news is that getting stuck is a
certainty in the new economy. Sooner, rather than later,
a product will be eclipsed at its prime. While one product
is at its peak, another will move the mountain by changing
the rules.

There is only one way out. The organism must
devolve. In order to go from one high peak to another, it
must go downhill first and cross a valley before climbing
uphill again. It must reverse itself and become less adapted,
less fit, less optimal.

This brings us to the second problem. Organizations,
like living beings, are hardwired to optimize what they
know and to not throw success away. Companies find devolving
a) unthinkable and b) impossible. There is simply no room
in the enterprise for the concept of letting go - let alone
the skill to let go - of something that is working, and
trudge downhill toward chaos.

And it will be chaotic and dangerous down
below. The definition of lower adaptivity is that you are
closer to extinction. Finding the next peak is suddenly
the next life-or-death assignment. But there is no alternative
(that we know of) to leaving behind perfectly good products,
expensively developed technology, and wonderful brands and
heading down to trouble in order to ascend again in hope.
In the future, this forced march will become routine.

The biological nature of this era means that
the sudden disintegration of established domains will be
as certain as the sudden appearance of the new. Therefore,
there can be no expertise in innovation unless there is
also expertise in demolishing the ensconced.

In the Network Economy, the ability to relinquish
a product or occupation or industry at its peak will be
priceless. Let go at the top.

10 The Law of
Displacement

The net wins

Many observers have noted the gradual displacement
in our economy of materials by information. Automobiles
weigh less than they once did and perform better. The missing
materials have been substituted with nearly weightless high
tech know-how in the form of plastics and composite fiber
materials. This displacement of mass with bits will continue
in the Network Economy.

Whereas once the unique dynamics of the software
and computer industry (increasing returns, following the
free, etc.) were seen as special cases within the larger
"real" economy of steel, oil, automobiles, and farms, the
dynamics of networks will continue to displace the old economic
dynamics until network behavior becomes the entire economy.

For example, take the new logic of cars as
outlined by energy visionary Amory Lovins. What could be
more industrial-age than automobiles? However, chips and
networks can displace the industrial age in cars, too. Most
of the energy a car consumes is used to move the car itself,
not the passenger. So, if the car's body and engine can
be diminished in size, less power is needed to move the
car, meaning the engine can be made yet smaller, which means
that the car can be smaller yet, and so on down the similar
slide of compounded value that microprocessors followed.
That's because smart materials - stuff that requires increasing
knowledge to invent and make - are shrinking the steel.

Detroit and Japan have designed concept cars
built out of ultralightweight composite fiber material weighing
about 1,000 pounds, powered by hybrid-electric motors. They
take away the mass of radiator, axle, and drive shaft by
substituting networked chips. Just as embedding chips in
brakes made them safer, these lightweight cars will be wired
with network intelligence to make them safer: a crash will
inflate the intelligence of multiple air bags - think smart
bubblepak.

The accumulated effect of this substitution
of knowledge for material in automobiles is a hypercar that
will be safer than today's car, yet can cross the continental
US on one tank of fuel.

Already, the typical car boasts more computing
power than your typical desktop PC, but what the hypercar
promises, says Lovins, is not wheels with lots of chips,
but a chip with wheels. A car can rightly be view as headed
toward becoming a solid state module. And it will drive
on a road system increasingly wired as a decentralized electronic
network obeying the Network Economy's laws.

Once we see cars as chips with wheels, it's
easier to imagine airplanes as chips with wings, farms as
chips with soil, houses as chips with inhabitants. Yes,
they will have mass, but that mass will be subjugated by
the overwhelming amount of knowledge and information flowing
through it, and, in economic terms, these objects will behave
as if they had no mass at all. In that way, they migrate
to the Network Economy.

Nicholas "Atoms-to-Bits" Negroponte guesstimates
that the Network Economy will reach $1 trillion by 2000.
What this figure doesn't represent is the scale of the economic
world that is moving onto the Internet - that grand net
of interconnected objects - as the Network Economy infiltrates
cars and traffic and steel and corn. Even if all cars aren't
sold online right away, the way cars are designed, manufactured,
built, and operated will depend on network logic and chip
power.

The question "How big will online commerce
be?" will have diminishing relevance, because all commerce
is jumping onto the Internet. The distinctions between the
Network Economy and the industrial economy will fade to
the difference of animated versus inert. If money and information
flow through something, then it's part of the Network Economy.

In the Network Economy, the net wins. All
transactions and objects will tend to obey network logic.

11 The Law of
Churn

Seek sustainable
disequilibrium

In the industrial perspective, the economy
was a machine that was to be tweaked to optimal efficiency,
and, once finely tuned, maintained in productive harmony.
Companies or industries especially productive of jobs or
goods had to be protected and cherished at all costs, as
if these firms were rare watches in a glass case.

As networks have permeated our world, the
economy has come to resemble an ecology of organisms, interlinked
and coevolving, constantly in flux, deeply tangled, ever
expanding at its edges. As we know from recent ecological
studies, no balance exists in nature; rather, as evolution
proceeds, there is perpetual disruption as new species displace
old, as natural biomes shift in their makeup, and as organisms
and environments transform each other. So it is with the
network perspective: companies come and go quickly, careers
are patchworks of vocations, industries are indefinite groupings
of fluctuating firms.

Change is no stranger to the industrial economy
or the embryonic information economy; Alvin Toffler coined
the term future shock in 1970 as the sane response of humans
to accelerating change. But the Network Economy has moved
from change to churn.

Change, even in its toxic form, is rapid
difference. Churn, on the other hand, is more like the Hindu
god Shiva, a creative force of destruction and genesis.
Churn topples the incumbent and creates a platform ideal
for more innovation and birth. It is "compounded rebirth."
And this genesis hovers on the edge of chaos.

Donald Hicks of the University of Texas studied
the half-life of Texan businesses for the past 22 years
and found that their longevity has dropped by half since
1970. That's change. But Austin, the city in Texas that
has the shortest expected life spans for new businesses,
also has the fastest-growing number of jobs and the highest
wages. That's churn.

Hicks told his sponsors in Texas that "the
vast majority of the employers and employment on which Texans
will depend in the year 2026 - or even 2006 - do not yet
exist." In order to produce 3 million new jobs by 2020,
15 million new jobs must be created in all, because of churn.
"Rather than considering jobs as a fixed sum to be protected
and augmented, Hicks argued, the state should focus on encouraging
economic churning - on continually re-creating the state's
economy," writes Jerry Useem in Inc., a small- business
magazine that featured Hicks's report. Ironically, only
by promoting churn can long-term stability be achieved.

This notion of constant churn is familiar
to ecologists and those who manage large networks. The sustained
vitality of a complex network requires that the net keep
provoking itself out of balance. If the system settles into
harmony and equilibrium, it will eventually stagnate and
die.

Innovation is a disruption; constant innovation
is perpetual disruption. This seems to be the goal of a
well-made network: to sustain a perpetual disequilibrium.
As economists (such as Paul Romer and Brian Arthur) begin
to study the Network Economy, they see that it, too, operates
by poising itself on the edge of constant chaos. In this
chaotic churn is life-giving renewal and growth.

The difference between chaos and the edge
of chaos is subtle. Apple Computer, in its attempt to seek
persistent disequilibrium and stay innovative, may have
leaned too far off-balance and unraveled toward extinction.
Or, if its luck holds, after a near-death experience in
devolution it may be burrowing toward a new mountain to
climb.

The dark side of churn in the Network Economy
is that the new economy builds on the constant extinction
of individual companies as they're outpaced or morphed into
yet newer companies in new fields. Industries and occupations
also experience this churn. Even a sequence of rapid job
changes for workers - let alone lifetime employment - is
on its way out. Instead, careers - if that is the word for
them - will increasingly resemble networks of multiple and
simultaneous commitments with a constant churn of new skills
and outmoded roles.

Networks are turbulent and uncertain. The
prospect of constantly tearing down what is now working
will make future shock seem tame. We, of course, will challenge
the need to undo established successes, but we'll also find
exhausting the constant, fierce birthing of so much that
is new. The Network Economy is so primed to generate self-making
newness that we may find this ceaseless tide of birth a
type of violence.

Nonetheless, in the coming churn, the industrial
age's titans will fall. In a poetic sense, the prime task
of the Network Economy is to destroy - company by company,
industry by industry - the industrial economy. While it
undoes industry at its peak, it weaves a larger web of new,
more agile, more tightly linked organizations between its
spaces.

Effective churning will be an art. In any
case, promoting stability, defending productivity, and protecting
success can only prolong the misery. When in doubt, churn.
In the Network Economy, seek sustainable disequilibrium.

12 The Law of
Inefficiencies

Don't solve problems

In the end, what does this Network Economy
bring us?

Economists once thought that the coming age
would bring supreme productivity. But, in a paradox, increasing
technology has not led to measurable increases in productivity.

This is because productivity is exactly the
wrong thing to care about. The only ones who should worry
about productivity are robots. And, in fact, the one area
of the economy that does show a rise in productivity has
been the US and Japanese manufacturing sectors, which have
seen about a 3 to 5 percent annual increase throughout the
1980s and into the 1990s. This is exactly where you want
to find productivity. But we don't see productivity gains
in the misnamed catch-all category, the service industry
- and why would we? Is a Hollywood movie company that produces
longer movies per dollar more productive than one that produces
shorter movies?

The problem with trying to measure productivity
is that it measures only how well people can do the wrong
jobs. Any job that can be measured for productivity probably
should be eliminated.

Peter Drucker has noted that in the industrial
age, the task for each worker was to discover how to do
his job better; that's productivity. But in the Network
Economy, where machines do most of the inhumane work of
manufacturing, the task for each worker is not "how to do
this job right" but "what is the right job to do?" In the
coming era, doing the exactly right next thing is far more
"productive" than doing the same thing better. But how can
one easily measure this vital sense of exploration and discovery?
It will be invisible to productivity benchmarks.

Wasting time and being inefficient are the
way to discovery. The Web is being run by 20-year-olds because
they can afford to waste the 50 hours it takes to become
proficient in exploring the Web. While 40-year-old boomers
can't take a vacation without thinking how they'll justify
the trip as being productive in some sense, the young can
follow hunches and create seemingly mindless novelties on
the Web without worrying about whether they are being efficient.
Out of these inefficient tinkerings will come the future.

In the Network Economy, productivity is not
our bottleneck. Our ability to solve our social and economic
problems will be limited primarily by our lack of imagination
in seizing opportunities, rather than trying to optimize
solutions. In the words of Peter Drucker, as echoed recently
by George Gilder, "Don't solve problems, seek opportunities."
When you are solving problems, you are investing in your
weaknesses; when you are seeking opportunities, you are
banking on the network. The wonderful news about the Network
Economy is that it plays right into human strengths. Repetition,
sequels, copies, and automation all tend toward the free,
while the innovative, original, and imaginative all soar
in value.

Our minds will at first be bound by old rules
of economic growth and productivity. Listening to the network
can unloose them. In the Network Economy, don't solve problems,
seek opportunities.